Bookkeeping vs. accounting: What’s the difference?

When you run an early-stage startup, you’re probably busy with product development, marketing, and bringing new team members on board — and bookkeeping and accounting might not be your main focus. But you likely know that you’ll need a reliable way to track income and expenses, so you can get a clear view of your company’s finances and make smart, informed business decisions.

In the world of startups, people often use the terms “bookkeeping” and “accounting” interchangeably. Although these practices have some overlap, each plays a different role in an early-stage business. Here’s what founders and operators need to know about the differences between bookkeeping vs. accounting, common mistakes to avoid, and when to seek outside help.

Accounting is the system of analyzing a business’s transactions, from logging and recapping to verifying and reporting on the financial data. Bookkeeping is a type of accounting dedicated to maintaining a company’s books. So, although bookkeeping and accounting work together, they have different purposes. The goal of bookkeeping is to keep your financial records in order, whereas the goal of accounting is to use those records to show your company’s bigger financial picture.

Here’s a quick look at what role each method plays in a B2B startup.

Bookkeeping

Early-stage companies use bookkeeping to manage their financial records. This involves recording transactions, organizing financial data, and reconciling accounts.

Bookkeepers will verify the accuracy of accounts, prepare trial balances, create financial statements, and enter data into bookkeeping software.

Accounting

Accountants take the bookkeeping data and analyze it to show how the business is performing. This information helps company leaders make smart decisions for growth.

Accountants prepare financial statements and reports, check that bookkeeping is accurate, and keep records updated for tax season and compliance.

In a small startup, one person might handle both bookkeeping and accounting. Although accounting and bookkeeping are connected and share some overlapping tasks (including recording financial activities), accounting requires more detailed financial assessments, and it relies on having accurate records. If your books aren’t up to date, your accountant’s financial reports and forecasts won’t be either.

Bookkeeping is a system for keeping track of your startup’s daily transactions. A bookkeeper’s tasks typically include:

• Recording transactions
• Reconciliation
• Updating records
• Handling invoices
• Managing payroll
• Overseeing accounts receivable and accounts payable
• Closing the books

The Internal Revenue Service (IRS) states that businesses should have a recordkeeping system showing income and expense transactions. It’s important to keep supporting documentation, like receipts, invoices, bills, purchase orders, sales slips, paid bills, deposit slips, cancelled checks, credit card receipts, and credit card statements.

As a startup founder or operator, you might also document client payments, track subscription expenses, file receipts, and reconcile your bank transactions. Keeping your books up to date will also give you a clearer picture of your company’s financial health and make it easier to provide accurate financial information when you need to secure financing or attract investors.

Accounting is a system for taking your financial records and turning them into useful insights. Bookkeeping is an important aspect of accounting because accountants rely on the information that bookkeepers collect to create financial statements and reports.

An accountant’s tasks typically include:

• Checking the bookkeeper’s work
• Creating financial statements
• Conducting audits
• Ensuring that taxes are handled correctly
• Analyzing financial performance
• Preparing tax returns
• Helping business owners understand their finances, so they can make strategic decisions
• Reporting financial data to tax authorities, such as the IRS (Note: The kind of business you run will affect which records you’ll need for taxes.)

As a founder, you’ll choose between cash and accrual accounting methods. You also might need outside help with more complex accounting work as your company grows, such as managing multiple revenue streams and handling work-in-progress accounting.

Bookkeeping and accounting depend on one another. Here’s a look at how they work together.

Startups need a good system for managing financial records, but you don’t have to hire a bookkeeper or accountant right away. However, if your books are falling behind or you find the process for entering transactions especially time-consuming, you may need bookkeeping services.

When you outsource your bookkeeping, the bookkeeper can help with creating accurate financial statements and reports, and they’ll ensure that your records are up to date, so you’re prepared for taxes or an audit. Having an outside expert take care of this for you can minimize errors and give you more time to focus on other business priorities.

If your taxes have become complex, you’re preparing for fundraising, or your business structure requires proper financial statements, you may decide to hire an accountant. A certified public accountant (CPA) can provide more customized services tailored to your stage of business.

Although a bookkeeper can offer daily assistance at a more affordable rate, they typically don’t have the formal accounting background of a CPA. An accountant can take a more strategic role in your business and you plan for tax obligations, evaluate financial decisions, and understand how your choices could affect your company’s finances. Whether you choose a bookkeeper or a CPA, the professional should be able to handle key tasks, such as managing accounts receivable, accounts payable, cash flow, payroll, and bank reconciliation.

Yes, it’s possible for founders to handle basic bookkeeping or accounting tasks in the early stages of their business. However, there are a few considerations to keep in mind before deciding to take on these financial responsibilities, including:

• What’s your transaction volume looking like? If you have a steady volume of simple transactions, you could manage bookkeeping internally.
• Have you set up proper bookkeeping systems? Be sure to maintain business books, such as ledgers and accounting journals. You may also decide to use bookkeeping or accounting software to help capture your records, and keep everything organized and secure. For instance, you could file your books by tax year and categorize them by types of income and expenses.
• Do you have the bandwidth to handle bookkeeping tasks? Before taking this on, be honest with yourself about the reality of wearing multiple hats. Ask yourself if you can realistically balance your books and operate a business from the ground up simultaneously.
• Do you have a grasp on accounting basics? Unlike bookkeeping, accounting requires specialized expertise. This is especially true when your startup is scaling. Although you don’t need to be an accounting expert, you should have a basic understanding of the key financial metrics.
• Is your business scaling beyond your accounting skills? When your business’s complexity grows, you may not have the in-depth knowledge needed to keep managing the accounting systems yourself. This is when it could be worthwhile to outsource some or all of your accounting activities to a qualified professional.

Your small business’s needs will likely change as it scales. Use these common scenarios to help decide the type of support you may need:

• Your finances are straightforward. You could probably manage simple bookkeeping on your own.
• Your books aren’t up to date. If you’re having trouble staying on top of your books, consider hiring an experienced bookkeeper to help organize your records.
• Transaction volume is increasing. Decide if bookkeeping remains a good use of your valuable time.
• You’re unsure how to record a transaction. Seek guidance from an accountant.
• You’re preparing to raise capital. Ensure that your financial records are ready for review. A professional who’s familiar with the world of venture capital can help.
• You’ve hired employees. Payroll tasks need to be managed properly. If your team is growing, it could be worth hiring an accountant.
• Your finances are becoming complicated. You may require support from a bookkeeper and an accountant. It could be time to clean up your books and hand them off to a professional.

This quick guide should give you clarity on which direction to take, so you can build a solid foundation that will support your business.

Here are some of the most common accounting and bookkeeping mistakes that early-stage startups make. Be sure to avoid these missteps.

Having out-of-date books

Maintaining accurate, up-to-date records will give you a clearer picture of your company’s financial position and help you make informed decisions. Falling behind can make it harder to spot cash flow issues, prepare financial statements, or meet tax deadlines.

Combining personal and business finances

Keep personal and business finances separate from the start. Using separate accounts and credit cards makes it easier to track business activity, maintain accurate records, and identify which expenses are eligible business deductions.

Not keeping supporting documentation

Keep receipts, invoices, bills, and other supporting documents organized and linked to the transactions in your books. Maintaining thorough records can make tax preparation easier and ensure that you’re prepared if the IRS asks you to substantiate an expense or transaction.

Having an overreliance on accounting software

Accounting software can automate many administrative tasks, but it doesn’t eliminate the need for human oversight. Review transactions regularly to catch errors, categorize expenses correctly, and make sure that your records accurately reflect your business activity.

Not getting help until an issue escalates

Don’t wait until a bookkeeping or accounting problem becomes difficult to fix. Getting professional help early can prevent small errors from turning into larger issues.

Procrastinating on your tax returns

Give yourself plenty of time to prepare and review your tax return. Starting early will give you time to gather documentation, resolve discrepancies, and address questions before the filing deadline.

Not claiming business expenses

Keep a detailed record of your business expenses and retain the necessary documentation. Tracking expenses throughout the year will make it easier for you to maintain accurate records and identify eligible tax deductions, so you can avoid leaving deductions on the table.

Now that you know the difference between accounting and bookkeeping, you can build a reliable records system for your business. Be sure to regularly check your numbers for accuracy, and consider hiring a bookkeeper or accountant for your small business. They can be a valuable resource as your needs change.

You don’t have to be an expert in bookkeeping or accounting to manage your startup’s finances. With Mercury, you can streamline your startup’s bookkeeping and accounting processes from the beginning. When you manage your online business banking through a Mercury account, your transactions stay organized and categorized, so your financial data is always ready for review. And, with Mercury’s accounting automations, you can sync all your bills, card transactions, employee expenses, and incoming payments, all from one account — so you can stay organized and spend more time focusing on building your business.